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kshemyakin
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Negative equity repo rates

October 24th, 2019, 5:46 pm

Hi!
What are the main factors driving negative equity repo rates? Is it purely supply and demand of the equities going 'special' or can these negative spikes be quantified somehow (like dividend yield and so on). Any materials would be appreciated!
“Real creativity won’t make things more complex. Instead, it will simplify them.”
 
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frolloos
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Re: Negative equity repo rates

October 24th, 2019, 6:55 pm

Good question.

This is a good place to start your analysis:

https://www.globalvolatilitysummit.com/ ... aribas.pdf
 
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Alan
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Re: Negative equity repo rates

October 25th, 2019, 9:42 pm

Good question.

This is a good place to start your analysis:

https://www.globalvolatilitysummit.com/ ... aribas.pdf

Frido, That was very interesting! 

I got a vague sense from the link that these so-called negative equity repo rates are always "implied" rates. Or, are there actual transactions in which the investment bank lends out stocks and pays the borrower for the privilege? 

Also, is the (implied or otherwise) equity repo rate on SPX or SPY currently negative? 
Where can you monitor such rates? 
Finally, can somebody post a chart for the SPX equity repo rates over the last two years: Jan 2018 to date?  (This last one would be *most* appreciated!)

 
 
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frolloos
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Re: Negative equity repo rates

October 27th, 2019, 1:38 pm

Good question.

This is a good place to start your analysis:

https://www.globalvolatilitysummit.com/ ... aribas.pdf

Frido, That was very interesting! 

I got a vague sense from the link that these so-called negative equity repo rates are always "implied" rates. Or, are there actual transactions in which the investment bank lends out stocks and pays the borrower for the privilege? 

Also, is the (implied or otherwise) equity repo rate on SPX or SPY currently negative? 
Where can you monitor such rates? 
Finally, can somebody post a chart for the SPX equity repo rates over the last two years: Jan 2018 to date?  (This last one would be *most* appreciated!)

 
Hi Alan,

I think they could be actual rates. They can go negative because cost of balance sheet of banks may be included in the repo rate - so it might be more expensive holding them than lending them against negative rate. I recall trying to understand negative repo rates when I was still trading TRS', and based on discussions with my coverage then I got a sense that bank balance sheet costs were factored into it. But don't pin me down on it.

Also, although not mentioned in the particular link I posted, cross-currency basis play a role as well in Compo TRS', for instance Compo to EUR MSCI World USD net TR would have a ccy basis in it, and I think that goes into the equity repo as well.

All in all a very interesting topic but AFAIK I'm afraid you can't find this data readily on BBG, hence I can't post  a chart of the YTD *long term* equity repo on say SPX, and like you would be interested in it as well. But I wonder whether with a combination of dividend swap data on SPX + futures on SPX you could back out the short term implied repo?

I think trading long term equity repo is not a crowded trade yet, and when I was still trading them I did see some true arbitrage opportunities, but that's an aside.
 
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Alan
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Re: Negative equity repo rates

October 28th, 2019, 2:27 pm

Thanks, Frido. If anybody with a Bloomberg (not me currently) can assemble an implied equity repo rate for the last couple years out of data they can find on their terminal, it would make an interesting post. Especially for SPX. 

Apparently kshemyakin is seeing them from somewhere. Perhaps he/she can follow up.
 
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kshemyakin
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Joined: October 21st, 2013, 4:45 am

Re: Negative equity repo rates

October 28th, 2019, 3:52 pm

Hi Alan!

I'm more interested in actual than implied repo rates. Sorry, I don't have SPX data, but I can show you recent GC vs. Equity repo rates in the Russian money market:
https://imgur.com/a/Q6F8hZj
The thing I was curious about were these negative spikes that correspond to ex-dividend dates (two of them in 2018). I've found a good explanation here:
http://finance.wharton.upenn.edu/~musto/papers/vote0204.pdf
The authors attribute such spikes to vote trading around proxy (ex-dividend) dates. However, the thing I'm still looking for is the magnitude of such spikes.

Kirill
“Real creativity won’t make things more complex. Instead, it will simplify them.”
 
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frolloos
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Re: Negative equity repo rates

October 28th, 2019, 4:33 pm

@Kirill another thing that could explain spikes is perhaps balance sheet "window dressing": maybe around end of quarters you see spikes because banks want to clean up their balance sheet for reporting purposes. I am not sure, but something to look at as well.

Vote trading and (possible) balance sheet cleaning-up can explain spikes, but I think it cannot explained the *sustained* negative repo for indices which is probably more due to a combination of more stringent regulation, cost of balance sheet, and supply and demand
 
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Alan
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Re: Negative equity repo rates

October 28th, 2019, 8:47 pm

Hi Kirill. Hard for us to say without local knowledge. 

Besides what was just mentioned, if the spikes are indeed associated with ex-dividend dates, there may be various dividend capture or avoidance strategies going on. 

In the US, for example, there was an abusive dividend capture strategy that went on for many years on the options exchanges until shut down by rule changes. Other strategies may not be abusive, but could be driven by different (dividend-related) tax treatments of various securities or the status of the buyer/seller, or idiosyncratic local rules. 
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